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(Article from Insurance Law Alert, December 2015)

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Addressing a matter of first impression under Oklahoma law, the Tenth Circuit ruled that excess and umbrella carriers did not have to “drop down” in the place of an insolvent primary insurer to defend or indemnify a policyholder in underlying asbestos litigation.  Canal Ins. Co. v. Montello, Inc., 2015 WL 7597429 (10th Cir. Nov. 27, 2015). 

Home Insurance Company provided primary insurance for Montello, a distributor of asbestos-containing products.  Home became insolvent before any claims were paid on Montello’s behalf.  When it became apparent that Home would be unable to fulfill its contractual obligations, Montello sought defense and indemnity from its excess and umbrella insurers.  Because underlying limits had not been paid, the excess and umbrella insurers sought a ruling that they had no duty to defend or indemnify Montello.  An Oklahoma federal district court ruled in the excess insurers’ favor, predicting that Oklahoma would follow the majority of jurisdictions to find that an excess insurer is not obligated to assume an insolvent primary insurer’s defense or indemnity obligations, absent policy language indicating the intent to do so.  Canal Ins. Co. v. Montello, Inc., 2013 WL 6732658 (N.D. Okla. Dec. 19, 2013) (discussed in our January 2014 Alert).  The Tenth Circuit affirmed. 

Ruling that excess and umbrella insurers had no duty to “drop down” to provide defense or indemnity, the Tenth Circuit rejected Montello’s argument that Home’s insolvency was an “occurrence” covered by the excess policies.  The court similarly rejected the argument that a primary insurer’s inability to pay a loss is equivalent to exhaustion by payment of loss.  The Tenth Circuit also dismissed Montello’s attempt to obtain coverage pursuant to various other policy provisions, including an “other insurance” clause, finding it inapplicable to the case at bar.  Finally, the court rejected Montello’s suggestion that the “reasonable expectations” doctrine provided a basis for finding coverage, finding that policy language was unambiguous, and that in any event, a reasonable insured would not have understood excess and umbrella policies to provide coverage insuring the solvency of the primary insurer.